Difference Between a Roth IRA and a Roth 401(k)

Many people can find similarities between a Roth 401(k) and a Roth IRA. Each contribution for each type of account will be made after taxes have been completed. The earnings from these accounts can be removed without being taxed at the age of 59 ½. Though these accounts have many parallels and similarities, they are also very different in a few key features.

How much is contributed

One of the biggest determining factors of a 401(k) is its contribution limit. Usually, the contributions have a high limit, which allow employees with a 401(k) plan to save around $18,000 annually. For a worker is over the age of 50, the limit for contributions made per year is $24,000 because of the catchup contribution caveat. IRAs have smaller contribution limits per age range. The typical limit is $5,500, but if you are employed and you are over the age of 50, you have the potential to contribute $6,500 to your IRA a year.

How its Distributed

One of the best parts of a Roth IRA is how the account can go on forever, and no minimum distributions are required at a certain age. It can also be passed along through generations, which can accumulate free earnings for each generation.

A Roth 401(k) is completely different, though. Once you reach the age of 70 1/2, this type of account will actually require distributions to be made. This might not necessarily be a bad thing if you are in the position where you need the money. If you want tax-free savings, though, there is a way to get around it. Rolling over to a Roth IRA will be better in this situation. The person in charge of the account has the option of switching their account, but it’s up to the needs of the person in charge.

Options for Investment

Account holders who want to invest into their accounts are given way more control over their Roth IRA than their Roth 401(k). People looking to invest are given many different options when it comes to investing. They can invest in stocks and bonds, for example, but the control over the funds that an employer can offer becomes extremely limited when making investments for a 401k plan. Employees can increase their options when they maximize their employer’s match and then use extra money towards their Roth IRA. This gives the employee the option to have full access to IRA options for investment they otherwise would not have had because of the restrictive employer’s plan.

Limits on Income

Contributions to a Roth IRA are off-limits when the modified gross income is at least $196,000 after it’s adjusted, and you are married or filing with a significant other. If you are filing IRA contributions with a significant other or a spouse, the limit goes beyond at least $133,000. This is a drawback of using a Roth IRA. With a Roth 401(k), there is no limit on income.

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